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TAX WITHHOLDING VS. TAX OWED

  • Writer: Treavor Dodsworth CFP®, CPA, CKA®
    Treavor Dodsworth CFP®, CPA, CKA®
  • Jun 19
  • 2 min read

One of the more common misunderstandings I see is how people see the relationship between tax withholding and actual tax owed.

Tax Withholdings Confusion

In America, we have a pay as you go system. In other words, when you start a job as an employee they will likely require you to fill out a W-4 form. This form will help guide your employer in knowing how much tax to withhold throughout the year. Then when you file your income tax return you will reconcile the amount withheld to the amount of actual tax owed.


The actual amount of tax you owe for the year is calculated on the income tax return. The withholdings are so that you are paying that estimated amount in over time as opposed to all at once when filing the return.


I have heard people say "Bonuses are taxed more." This is inaccurate. They are typically taxable income just like your wages are. The amount that may be withheld may be higher due to how withholdings are calculated but what ultimately matters is the tax when you file your return.


In the context of monthly financial margin, this relationship is significant because if your withholdings are inaccurate it may give you an inaccurate picture positive or negative. For example, in another business, I have seen people over withholding taxes by $600+/mth. They will get this money back when they file their return but that is quite a bit of monthly margin they could have had throughout the year as opposed to giving the government an interest free loan.


On the flip side, if your withholdings are under by several hundred a month, and you are spending all of your income, tax time may result in you going into consumer debt as you try to figure out some way to pay the tax you owe.


Accurate withholdings help you to have a correct understanding of your monthly financial margin.

 
 

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